Earnings Call Digest 7.20.17

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Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

The first week of earnings season showed a continued abundance of optimism.  Expectations have definitely risen for the economy.  Curiously though, expectations have not risen for interest rates.  Citigroup’s CEO mentioned that he only expects one rate hike per year through 2020.  Banks were prominent this week and credit quality remains strong, but CRE is an area where there appears to be a growing mismatch between risk and reward.

The Macro Outlook:

Optimism abounds

“Main Street continues to rebound. Our confidence is up. I’ve been in 23 of our 26 regions in the last few months…everyone is talking about increased optimism on the part of small- and medium-sized businesses…I’ve had 23 lunches where I’m sitting and talking to six to eight business people over the last few months. I’ve gotten this across our entire footprint…All of that is very, very positive.” —BB&T CEO Kelly King (Bank)

CEOs are confident

“I would say the CEOs are confident, the conversations are happening all the time and strategic M&A in the U.S. those discussions are occurring especially in technology and consumer retail and natural resources.” —Goldman Sachs CFO Martin Chavez (Investment Bank)

Consumers and investors are bullish on America

“across all the years since the crisis there has been ebbs and flows in customers’ views about where they want to invest and the cash portion of our balances has come up and down. But I think the consumer and the investor are very bullish on America and they continue investing” —Bank of America CFO Paul Donofrio (Bank)

Retail investors are highly engaged with the market

“We are seeing this quarter very broad-based engagement in the market, so everyone from brand-new customers opening their first account to very active traders seem to be engaged in the market. We saw a good activity across pretty much all of our products…So on the other end, the conundrum part is, as we said, we’re at multi-decade lows in the VIX, which tends to drive more trading activity.” —TD Ameritrade CEO Tim Hockey (Broker)

Voices of warning are few and far between

“…don’t be mesmerized by the blue skies created by central bank QE and near perpetually low interest rates. All markets are increasingly at risk….Strategies involving risk reduction should ultimately outperform “faux” surefire winners generated by central bank printing of money. It’s the real economy that counts and global real economic growth is and should continue to be below par.” —Janus Portfolio Manager Bill Gross (Investment Management)

Yet the expectation of low yields persists

“while markets have started to anticipate a normalization, a policy in the environment of sustained expansion, negative yields remain a reality in some countries and expectations for a continued low yield environment persists.” —Blackrock CEO Larry Fink (Investment Management)

Central banks aren’t very hawkish

“The incoming information confirms a continued strengthening of the economic expansion in the euro area, which has been broadening across sectors and regions…While the ongoing economic expansion provides confidence that inflation will gradually head to levels in line with our inflation aim, it has yet to translate into stronger inflation dynamics.” —ECB President Mario Draghi (Central Bank)

Citigroup is only expecting four more rate hikes through 2020

“we’ve got one more rate hike for the US built in and its December of this year. And quite frankly we’re assuming one more rate hike in ’18, one more rate hike in ’19 and one more rate hike in ’20.” —Citigroup CEO Miles Corbat (Bank)

A lot is still riding on a tax cut

“And can I guarantee that all the craziness in Washington will not derail that? No. But I’ll be honest with you as I’ve talked to business people out there, they’re not worried about all this craziness going on in Washington. They’re just focusing on growing their business. Now I will say I think they are expecting a tax reduction deal and, to a lesser degree, they’re counting on infrastructure. But if we get the tax reduction deal, they’ll continue” —BB&T CEO Kelly King (Bank)


Emerging markets have been weak for a long time

“since the financial crises, interest rates, currencies etcetera, we’ve had a prolonged period of about eight, nine years now where we have seen significant weakening of emerging market currencies…you actually see the volume component of these emerging markets continuing to be very, very low, while historically it was all volume-driven growth. I am convinced that that is coming back now.” —Unilever CEO Paul Polman (Packaged Goods)

China may be stabilizing

“China for example is actually much more stable than the last 12 to 18 months. I like what I’m seeing in China right now.” —Abbott CEO Miles White (Medical Device)

Chinese are still buying international assets

“we’re still seeing the trend of Chinese buying and international assets. ” —Goldman Sachs CFO Martin Chavez (Investment Bank)


The Fed should start shrinking its balance sheet in September

“So on the balance sheet, it is still the case that we expect to start seeing normalization in the balance sheet, in September, if not in September by the end of this year with the actually calling for the next rate hike in December the market is calling for March of next year.” —JP Morgan CFO Marianne Lake

No one knows how it will affect banks

“I mean the Fed has never had a balance sheet of this size. We’ve never been through a situation where they’re talking about reducing a balance sheet. We can talk about history all day long, but since we’ve never been through that, nobody knows exactly what’s going to happen.” —Wells Fargo CEO Tim Sloan (Bank)

There will likely be an increase in competition for deposits

“we think as excess liquidity comes out of the market you could expect to see and you will expect to see more competition with respect to deposits, I would also expect that the long end of the curve on a relative basis would be a little bit higher” —US Bancorp CFO Terry Dolan (Bank)

Consumers may not shift deposits until rates are higher

“I think we are a couple of moves away from the Fed before you start really seeing the positive beta shift on the consumer side.” —PNC CEO Bill Demchak (Bank)

CRE lenders see unfavorable risk and return

“there’s a fair amount of competition in stabilized commercial real estate projects, I mean there’s lots of liquidity out there. And so this quarter there just happen to be more transactions that we’ve looked at where we said, gosh, another risk return it just isn’t there” —Wells Fargo CEO Tim Sloan (Bank)

“[we] remain cautious in commercial mortgage markets where the competitive environment has created unfavorable conditions from a risk and return standpoint.” —US Bancorp CFO Terry Dolan (Bank)

So far credit quality in CRE has remained pristine

“As far as the credit quality within commercial real estate has been pristine…as far as the strength of our commercial real estate portfolios, it’s performing extremely well.” —Comerica CCO Pete Guilfoile (Bank)


AI is becoming ubiquitous

“AI is going into every segment of our growth sectors. AI is getting to mobile. AI is getting to high-performance computing like deep learning. AI will go into automotive…And AI will go to simple IoT, MCU also…it is ubiquitous.” —Taiwan Semiconductor Co-CEO Mark Liu (Semiconductors)

Financial service companies are adopting it

“Technology will impact all aspects of our business…Our investment teams are combining big data and machine learning with traditional fundamental human analysis to generate better sustainable alpha for our clients.” —Blackrock CEO Larry Fink (Investment Management)

“We are focused on our digital agenda on advancing the way we leverage data on exploring and piloting smart investments and things like AI and robotics on setting the standard in terms of the experience for our customers and distribution partners and as always on being as productive and efficient as possible.” —Travelers CEO Alan Schnitzer (Insurance)

“We have a number of expense initiatives. We are using, for example, artificial intelligence, AI, robotics…we will be going enterprise-wide in terms of finding ways to take these repetitious activities and apply good digitization and artificial intelligence to find more efficient and effective ways to reduce our cost.” —BB&T CEO Kelly King (Bank)

Robots are not necessarily that much cheaper than people

“If you look at the average basis points paid from the various robo platforms, they range in general like things from something like 20 to 40 basis points. If you look at the average basis points for a full service advisory like us, just divide our revenue into our assets including everything, you get somewhere in the 70s, low 70 basis points. So the value added of the financial advice and the institutions behind it and the research, the product offering, the new issued calendar you could argue is being put out there for 30 to 40 basis points. It’s not clear to me that, that is such an expensive gap that that’s going to lead to the cannibalization issues” —Morgan Stanley CEO James Gorman (Investment Bank)

80% of the world’s data isn’t public

“80% of the worlds data is owned by enterprises, it’s not searchable on the worldwide web, it’s customer data, and patient data, clinical data, supply chain data, transaction data and companies want to unlock and exploit that data.” —IBM CFO Martin Schroeter (Technology)

John Legere had nice things to say about Masayoshi Son. Trying to butter him up?

“let’s remember that [Masa] is one of the richest, biggest dealmakers in the world and his moves are significantly tracked and I dare any of you to dissect when he is working on vision fund and when he is working on, the guy is one of the biggest players in the world. And what he has been doing makes sense. That’s Masa. Sprint is very lucky to have him as an owner.” —T-Mobile CEO John Legere (Telecom)

3G/4G market growth is now just 6%

“For calendar 2017 3G, 4G device shipments, we continue to estimate shipment of 1.75 billion to 1.85 billion devices globally, up approximately 6% year-over-year at the midpoint.” —Qualcomm CEO Steve Mollenkopf (Semiconductors)


Manufacturers are trying to increase prices

“we are increasing our price that we are realizing out there in the marketplace…so we are seeing improved pricing versus where we were last year when we said sort of said hey guys enough is enough, we need to start getting some price back into the market…I think it’s moving in the right direction.” —Textron CEO Scott Donnelly (Conglomerate)

Transportation markets seem sluggish

“a few of our markets will experience year-over-year volume declines in the third quarter due to market specific headwinds you’re very familiar with. Auto shipments will be impacted by softening production.” —CSX CFO Frank Lonegro (Railroad)

“Truckload volume growth has slowed from the second quarter. The holiday timing makes precise comparisons difficult this early in the month but truckload volume growth has been in the low single digits.” —CH Robinson CEO John P. Wiehoff (Trucking Logistics)

Miscellaneous Nuggets of Wisdom:

It’s ok to fail. It means you’re trying.

“Failure is not such a bad thing and if you’re not failing maybe you’re not trying hard enough…you want to be introspective and look at that and say, are we being adventurous enough?” —Netflix CCO Ted Sarandos

Press your winners

“You ask about how we prioritize? Generally, when we see success, we try to add on to that until we reach a point of diminishing returns. And so, if we’re going to see success in some markets, we may up the content budget in those markets.” —Netflix CEO Reed Hastings (SVOD)

Full transcripts can be found at www.seekingalpha.com